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I'm pasting a bunch of content from IRS publication 4221-PC. Much of this language should probably be quoted (with Attribution, probably well within Fair Use) in policy pages at the wiki, and we ought to develop similar (sticky?) policy pages for the forum/blogs. I notice that Chris has already begun some blog policy pages.

Federal tax law provides tax benefits to nonprofit organizations recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (Code). The Code requires that tax-exempt organizations must comply with federal tax law to maintain tax-exempt status and avoid penalties.

In Publication 4221-PC, the IRS addresses activities that could jeopardize a public charity's tax-exempt status. It identifies general compliance requirements on recordkeeping, reporting, and disclosure for exempt organizations (EO’s) described in section 501(c)(3) of the Code that are classified as public charities. Content includes references to the statute, Treasury regulations, IRS publications and IRS forms with instructions. Publication 4221-PC is neither comprehensive nor intended to address every situation.

To learn more about compliance rules and procedures that apply to public charities exempt from federal income tax under section 501(c)(3), see IRS Publication 557, Tax-Exempt Status for Your Organization, and the Life Cycle of a Public Charity on www.irs.gov/eo. Stay abreast of new EO information, also on this Web site, by signing up for the EO Update, a free newsletter for tax-exempt organizations and practitioners who represent them. For further assistance, consult a tax adviser.

What activities may jeopardize a public charity’s tax-exempt status?

Once a public charity has completed the application process and has established that it is exempt under section 501(c)(3), the charity’s officers, directors, trustees and employees still have ongoing responsibilities. They must ensure that the organization maintains its tax-exempt status and meets its ongoing compliance responsibilities.

A 501(c)(3) public charity that does not restrict its participation in certain activities and does not absolutely refrain from others, risks failing the operational test and jeopardizing its tax-exempt status. The following summarizes the limitations on the activities of public charities.

Private Benefit and Inurement

A public charity is prohibited from allowing more than an insubstantial accrual of private benefit to individuals or organizations. This restriction is to ensure that a tax-exempt organization serves a public interest, not a private one. If a private benefit is more than incidental, it could jeopardize the organization’s tax-exempt status.

No part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. This means that an organization is prohibited from allowing its income or assets to accrue to insiders. An example of prohibited inurement would include payment of unreasonable compensation to an insider. An insider is a person who has a personal or private interest in the activities of the organization such as an officer, director, or a key employee. Any
amount of inurement may be grounds for loss of tax-exempt status.

In cases where a public charity provides an excess economic benefit to a person who is in a position to exercise substantial influence over its affairs, the organization has engaged in an excess benefit transaction (see Reporting Excess Benefit Transactions on page 8) that subjects the person to possible excise taxes. Go to I R S Exempt Organizations website for details about inurement, private benefit, and excess benefit transactions.

Political Campaign Intervention

Public charities are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) a candidate for public office. Contributions to political campaign funds or public statements of position made on behalf of the organization in favor of or in opposition to any candidate for public office clearly violate the prohibition against political campaign activity. Violation of this prohibition may result in revocation of tax-exempt status and/or imposition of certain excise taxes.

Certain activities or expenditures may not be prohibited depending on the facts and circumstances. For example, the conduct of certain voter education activities (including the presentation of public forums and the publication of voter education guides) in a non-partisan manner do not constitute prohibited political campaign activity. Other activities
intended to encourage people to participate in the electoral process, such as voter registration and get-out-the-vote drives, would not constitute prohibited political campaign activity if conducted in a non-partisan manner. On the other hand, voter education or registration activities with evidence of bias that would favor one candidate over another,
oppose a candidate in some manner, or have the effect of favoring a candidate or group of candidates, will constitute campaign intervention.

The political campaign activity prohibition is not intended to restrict free expression on political matters by leaders of public charities speaking for themselves as individuals. However, for their organizations to remain tax exempt under section 501(c)(3), organization leaders cannot make partisan comments in official organization publications or at official functions and should clearly indicate that their comments are personal and not intended to represent the views of the organization. Read Revenue Ruling 2007-41 at www.irs.gov/eo for additional information on the prohibition against political campaign intervention.

Legislative Activities

A public charity is not permitted to engage in substantial legislative activity (commonly referred to as lobbying). An organization will be regarded as attempting to influence legislation: if it contacts, or urges the public to contact, members or employees of a legislative body for purposes of proposing, supporting or opposing legislation; or if the
organization advocates the adoption or rejection of legislation.

If lobbying activities are substantial, a 501(c)(3) organization may fail the operational test and risk losing its tax-exempt status and/or be liable for excise taxes. Substantiality is measured by either the substantial part test or the expenditure test.

The substantial part test determines substantiality on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted and expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial.

As an alternative, a public charity (other than a church) may elect to use the expenditure test by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organizations To Make Expenditures To Influence Legislation. Under the expenditure test, a public charity’s lobbying activity will not jeopardize its tax-exempt status
provided its expenditures related to lobbying do not normally exceed a set amount specified in section 4911 of the Code. This limit is generally based on the size of the organization and may not exceed $1 million. Read the Life Cycle of a Public Charity at I R S Exempt Organizations website for additional information about the rules against substantial legislative activities.